Make your money work for you!

defaults

There has been a significant amount of drama happening around Bondora this month.The new passive portfolio manager caused a fair bit of controversy and the API is still in testing so many investors have at least temporarily reduced investments. For me, the old PM is still active and can give out about 4K worth of loans, so I’m hoping that will tide me over until you can use the API to invest. This means that all the money I transferred into social lending this month went into Moneyzen and Estateguru. However, my Bondora portfolio is big enough that it just does its own thing even without adding in money.

Due to not adding much money into Bondora for the last couple of months, you can see the 60+ defaults becoming a more significant part of my portfolio. There are two reasons for this – firstly that the loans from the big growth months from last year are now defaulting, and the loan pieces that are defaulting at this point are starting to be the 15-25€ pieces as opposed to the 5€ pieces that used to default earlier. However, despite the continuously increasing defaults this was another record month for me in terms of interest earned:

Total interest earned for October ended up being 108,29€, meaning that this year is likely to end at 110€/month from Bondora, so I’m quite happy with the overall result already due to how much less I’ve invested into Bondora this year compared to what I had originally planned. Adding in Estateguru and Moneyzen, my P2P monthly earnings come just close to 125€.

I plan to add just a bit more money into Bondora this year to finish December with a total of 5K euros in deposits. My account will turn 3 years old in December and I guess I’ll have to write a longer overview into returns from Bondora and whether or not it’s been performing as I wished it to.

Another topic that’s starting to become more and more interesting as my portfolio ages is the recovery rate. I see pretty decent movement from recovery every month, and at this point I’m waiting for my monthly recovery to reach 20€/month. Should probably realistically happen mid-way through next spring. Recovery for last months looks like this:

Overall, I’d say, keep calm and wait for the API. I’ll probably be looking into it soon as well, once other third parties have made their solutions accessible. Overall, I was thinking about it a bit and I don’t even need anything super complex. I’d probably set my PM to just what I had now – AA, A, B &C loans OR any kind of Estonian loan. Not rocket science, so I’d assume that with the help of some friends working in IT it should be doable once more details about how the API works come apparent (like how exactly do the loans get distributed between bids!)

Recovery is a topic that tends to divide investors into two camps. One half argues that no recovery is happening and that defaults are climbing at an incredible rate, while the others dig around the data and come to the conclusion that recovery happens, but it’s just overall brutally slow.

A lot of people also seem to be very optimistic about the impact that recovery will have on their portfolio. The best way of thinking about recovery (in my opinion) is hoping for an overall break-even. This means that overall, while with a time delay, you do not lose money on defaults. The actual returns come from the loans that are paying on time – and they are the majority.

This month though, my portfolio hit 1000€+ in defaults, which of course is not pleasant to look at. I have however been keeping track of recovery, and I’m not particularly worried here, it’s a matter of time. I threw together some quick Excel graphs to visualize my portfolio happenings.

How much do people really owe me?

This graph is a simple money recovered – exposure at default (recovery-EAD2). As you can see, in raw numbers the debts are big, and you can easily see them piling up to 1000 euros. Now, where things get interesting, is where you normalize the recovery to a 1 to -1 scale, to take into account the actual loan size as well. In this graph -1 means that absolutely no recovery has happened, 0 means break-even point and anything above that is bonus.

The timeline of course runs from left to right, so the oldest defaults (I have 149 defaults in total) are on the far left. You can clearly see that the older loans are much closer to being recovered, but there is significant time delay. (Take into account that the loans are lined up by the day I invested into them, not by the date of when they defaulted.) Overall to visualize this – the part between 0 and -1, the white area is what has been recovered and the blue is what should still be recovered. For me, the total recovery is currently close to 180€, but it’s clearly speeding up.

Sadly monthly recovery is a disaster to actually keep track of, but I’ve been religiously taking screenshots of the recovery table on your statistics page ever since it got launched to track the recovery information there. For the past 4 months recovery has been more than 10€ every month, which might not seem like much, but if we look at the time delay then it’s reasonable to expect that it will keep accelerating. (I mean, for a long time recovery was less than 1€ per month.)

Since people want to take out high interest loans, then of course someone has to offer them. Bondora’s new rating system means that HR credit rating clients will have their interest rates at anything from 50-90%, due to the increased risk levels associated with the group.

As some of you may know, I have a small running experiment, where I occasionally take in super high interest loans to track how they’re doing and whether the theoretically higher interest level (which will theoretically pay out 3x principal payment) actually compensates for the losses.

By now the first loans given out under the new system are old enough to start seeing some defaults, so a quick look into how my high interest loans (>50%) have actually done. As you can guess it’s not a pretty picture.

I have a bit more then 20 high interest loans, less than ten of those are old enough to start drawing any sorts of conclusions from them. The first nine are 5-8 months old, which is a point where many defaults have already happened (a lot of loans default right at the start).

As you can see, out of the 9 loans old enough to look at, 4 have defaulted, 3 are delayed (one will default in a matter of days) and only two are actually paying, but out of those two one has had the payments rescheduled. Not a particularly rosy picture.

However, by this point the 9 loans have already paid enough interest and penalties to balance out one of the defaults in case no recovery ever happened, so you can clearly see the ridiculous interest at work here. Provided the two green loans “hold our” for a while more and keep paying, the investment will be well on track to zero-sum before recovery, which might not seem to be the case when you look at how depressing the overall picture is.

Overall, I’d say that the results so far are as expected, a high default rate is unavoidable with such high interest rates and HR risk group, so I wouldn’t recommend testing this out of you’re trying for a conservative portfolio. For those chasing higher turns in the long run and hoping for recovery, it might work out quite well in the end. This is the part of my portfolio that I track for fun, so it only makes up ~2% of my overall portfolio value.

While the title may seem a bit harsh, this is the reality of what many people think – if you take out a high interest loan then there are very few reasons to do so, the top one being that the person taking out the loan is just plain stupid. Is that the case though, or is that always the case? If so, why are 90% loans even legal?

Maximum interest rates by law

Estonia is currently in the process of regulating maximum interest rates for loans. As it stands, the maximum is to be set at 3x average consumer credit rate, which makes the cap out to be at just about 90% interest. For any investor, 90% returns would be in the realm of magic, which is why such an interest rate for loans raises a lot of questions, why would anyone take out a loan with such an interest rate?

Loan eligibility

The answer to the question of why anyone would take out such a loan is easy – they aren’t eligible for any other loans. It seems some people (often investors) forget, that the majority of the population isn’t as well off as they are. Whether or not you’re credit worthy depends on many different aspects, and once you fail too many criteria it’s easy to see the interest rates climbing.

Having a low paying (or minimum wage) job, living outside of the capital, having multiple children, not having enough education etc. are all warning signs for creditors that increase your risk levels exponentially. While most people who have their finances in order can easily enjoy the chance to take out 9-12% consumer credit loans when necessary they are definitely a minority in the population.

This is one of the reasons why I’m in favour of capping interests, but against outlawing things like SMS loans for example. In Estonia, SMS loan has more than 100 000 customers! They are clearly offering a service that people need (and I agree that it’s super sad how many people need the service!). However, if we ban the service, what will people do? Steal? Get illegal loans from someone? While we can and should educate people, just cutting people off from money when they need it is not a good plan in the long run.

How bad are 90% loans?

Many people (rightly so!) believe that 90% loans are super expensive in terms of interest paid in the long run. The problem being, most people don’t really assess their loans in terms of the ratio of interest vs principal but they look at the monthly total payment. If they can afford the monthly payment then everything is OK, despite the fact that the interest rate might be insane.

I made a chart that shows monthly payback sums for a 1000€ loan with various interest rates for 1 year and 3 years. While you can see the totals climbing at an alarming rate, you don’t see the steep growth for monthly payments – every 10% of extra interest only increases the payment by about 5-6 euros. That’s not enough to make people really consider not taking out the loans.

How to fix this?

As boring as the solution is, then more financial education is the way here. How effective that would be, is however, questionable. The high interest loans are theoretically OK as long as people are capable of making the payments.

The problems arise when people miss payments, and the interest and penalties start stacking up at an alarming rate, causing the situation where the interest owed is multiples of the original principal payment. That’s when we have a problem that has caused tens of thousands of Estonians to default on loans and the law has failed to protect them from their “stupidity”.

However, it’s not just stupidity that’s making people take out high interest loans – it’s lack of financial awareness, its difficult financial situations and a lack of emergency funds and living from pay-day to pay-day, all of those not as easy to change as we’d wish them to be.

I realised then titling this post that soon I will have been investing into Moneyzen for a year. The only thought that comes to mind with this – underwhelming. Moneyzen has greatly underperformed my expectations and if a secondary market existed at this point I’d likely make a full exit from the site.

Thoughts on Moneyzen’s current situation

Having invested into Moneyzen for 10 months now, I’m struggling to even fill my original goal of 50€ invested per month. I haven’t wanted to reduce the requirements I have for the loans I wish to invest into since their whole business plan was to have high quality borrowers. This means that while I’ve kept interests reasonable in my opinion then money has been moving slowly and I’ve had time when no loans have gone out for close to a month.

I’m not sure if it’s an issue with their business model or the way they select their clients. At this rate the lack of liquidity is becoming a bit of a liability since exiting the portal is a time consuming process. Also, I’ve now had two loans go into collections as well, which means that a sum close to the number of euros I’ve made in investments is now locked down.

Just overall I’m feeling very unimpressed and I can’t really figure out what the issue is. Is there truly a level of market saturation that they can’t break through? Is there a lack of clients that they’d like or is it just that at the interest point they are at people would prefer loans? Will the hoped expansion to Finland finally be the key? Whatever it is, then other portals are showing growth while Moneyzen is just not doing much of anything. I’m considering just stopping all investments at this point to not lock down more money and just see how it goes.